Carbon Tax Idea Gains Wonkish Energy

With the fiscal cliff looming and parts of the U.S. still digging out from the aftermath of Hurricane Sandy, calls for the U.S. to adopt a carbon tax are gathering steam–even though there’s little sign of interest from Congress or the White House.

Today the conservative American Enterprise Institute is holding an all-day, on-the-record discussion of the idea. And the Brookings Institution is unveiling a slate of new measures meant to make the government more effective, including a carbon tax that could raise $1.5 trillion over ten years. All that follows a cascade of carbon-tax advocacy in recent days from the chatteringclasses and a slate of academic work over the summer (not to mention our own two cents).

The idea of a carbon tax is simple: Put a price tag on the harmful emissions from fossil fuels, such as oil and coal, and use the revenues to fund clean-energy development, pay down the deficit or slash taxes. Proponents often describe it as a win-win-win policy, because carbon taxes would penalize things that are bad (pollution) and lower taxes on things that are good (labor and capital).

“The time seems ripe for this discussion. The president is committed both to raising tax revenue and to dealing with climate change. A carbon tax kills two birds with one stone,” said Gregory Mankiw, a Harvard economist who advised the Romney campaign and has long pushed for more efficient taxation, including a carbon tax.

The Brookings proposal would impose a $20 fee on each ton of carbon, raising an average of $150 billion per year over a decade. Congress and the president would have to decide exactly how to use the money. Research by MIT and Brookings suggests that business-related tax breaks, whether corporate taxes or taxes on investment, would provide the biggest boost to economic growth and job creation.

But at least $30 billion a year should be earmarked for energy research and development, says Mark Muro, a senior fellow at the Brookings Metropolitan Policy Program. That’s because even a price on carbon emissions would not automatically make low-carbon energy such as wind, solar, geothermal and the like economically competitive with traditional fuels. Some research indicates that a $20 carbon tax would actually amount to less support for clean energy than the existing panoply of tax breaks and subsidies.

Alas for the wonks, a carbon tax is a new tax, and that isn’t a popular idea in Washington. Opponents of carbon taxes are rolling out their own intellectual artillery, arguing that the tax would stunt economic growth for little benefit. Grover Norquist, president of Americans for Tax Reform, said taxing energy consumption “would inevitably lead to higher taxes … even if originally passed with offsetting tax reductions elsewhere.”

Even one-time proponents of a carbon tax in Congress have disavowed the idea. While President Barack Obama mentioned climate change in his victory speech last week and has let the Environmental Protection Agency clamp down on emissions from coal-fired power plants, he has yet to outline any comprehensive plan to tackle climate change in his second term.

The carbon-tax crowd is a big tent, bringing together deficit hawks, growth mavens and climate worriers. The ideological diversity could be a plus–but only if advocates can leverage it to win political support from both sides of the spectrum.

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